Business Law Resources

A business entity is a legal structure separate and apart from its owners (like an adult child). This provides personal liability protection for the business owners and the business’ management. I consider business entities to be: Limited Liability Companies (LLCs), Corporations, Limited Partnerships (LPs), Limited Liability Partnerships (LLPs) and Liability Limited Partnerships (LLLPs). A revocable trust is not a business entity in most states, and neither are sole proprietorships or general partnerships. Business entities can sue and be sued, incur and collect debt, make contracts, breach contracts and do most things that human individuals can do. Business entities also have their own equivalent of a social security number called an EIN/TIN (Employer Identification Number/Taxpayer Identification Number). Business entity owners should never use their personal social security number for their business entity, or they may lose their separate and distinct status (corporate veil) from their company.

Generally, no, but it varies by State. In Arizona, revocable trusts are not business entities. A revocable trust is a legal arrangement to ensure a person’s assets go to specific beneficiaries upon death. A trust (if done correctly) eliminates the need for probate (court intervention to distribute assets after a person dies). Having a business entity owned by a revocable trust is a common part of a business succession plan.

A “sole proprietorship” is an individual doing business as an individual or in a community property state (like Arizona, California or Nevada), a husband and wife doing business. The owner(s) of a sole proprietorship are 100% personally liable (responsible) for any business activities and debt. If the sole proprietorship fails, the business owners will likely have to file personal bankruptcy to get out of the business debt as the business debt is also their personal debt. Sole proprietorships generally must pay self-employment tax and they do not get many of the tax benefits of being a business entity. Sole proprietorships may also operate under a trade name (aka fictitious name).

A “general partnership” is defined as two or more unmarried people operating a business for the purpose of making a profit. For example, this could be two friends forming a band to play gigs at local bars. There is no formality required to form a general partnership in Arizona, California or Nevada (not necessarily true in Delaware). Both partners are 100% personally liable (responsible) for partnership activities and debt. The responsibility is not split between the partners, but each partner is 100% liable for partnership debt. If the general partnership fails, the partners may have to file personal bankruptcy to get out from under the business debt as the business debt is also their personal debt. Partners in a general partnership typically must pay self-employment tax and they do not get many of the tax benefits of being a business entity. General Partnerships may also operate under a trade name (aka fictitious name), and they may need to record documentation of their use of a trade name with the County recorder in the County where they operate their partnership to be in compliance with the law.

Both LLCs and Corporations shield their owners and management from personal liability for business debt and activities. They are legally considered individuals and are completely separate and apart from their owners if ALL legal formalities are followed. This is called the corporate veil. Legally, from a personal liability protection standpoint, there is no difference between an LLC or a corporation. In most States, LLCs have less structure and annual reporting, and Corporations have a more formal structure and more reporting. Generally, the type of business and how many owners it may have determines which type of business entity would be most advantageous.

Maybe, it depends. I want to say an unqualified “YES!!!” but I think there are some instances when an LLC would not necessarily protect the owner from any personal liability (based on the type of business). I think, however, that generally having a company shell to protect the owners from personal liability makes sense in most cases, especially with the ease of company formation. This would be a case-by-case analysis to determine whether or not a business entity is right for you. A CPA should also join in this conversation along with an attorney.

YES!!! An attorney has experience and malpractice insurance. Not only that, but a qualified attorney can help you prevent the common mistakes that businesses make that result in litigation or other costly missteps. Even if you decide to do the actual formation of the business entity yourself, you should always speak with an attorney before doing so. We focus on preventing costly litigation by ensuring businesses are set up correctly at the beginning and maintaining them correctly on an ongoing basis. You may think you or a third-party filing company has done everything correctly (and maybe you have), but if you have not, it will be costly to fix it when you find out. Besides, YOU (as a business owner) need to focus on what brings your business money and not doing things that you could pay others to do while you focus on bringing in money to your business.

A “qualified attorney” for your business is an attorney who has practiced business law and has experience in that area. It is ideal to find an attorney that has worked with your industry, but it is not necessary so long as your attorney has experience with business formation, maintenance and dissolution. All attorneys have the same degree and have passed the same bar exam if they work in your State. However, attorneys focus their practices on different areas, and you need one that has experience in yours. For example, I have practiced all types of business law for over 27 years, but I do not practice personal injury or family law. If you have those issues, I will refer you to one of my colleagues who focuses on those areas of law. Generally, you do not want an attorney who handles every type of legal matter for you as those attorneys tend to be jacks of all trades and the masters of none (with very few exceptions).

Yes!!! Always consult with a qualified CPA whenever you are forming a business or making any changes to your business. A CPA does not need to handle your day-to-day bookkeeping, but you should consult with one to be sure you are minimizing your tax liability by using all the deductions available to you (like attorney/CPA fees, etc.). LLCs and corporations may choose how they are taxed (C-Corp, S-Corp, etc.) and some methods of taxation are more advantageous for your business than others. A qualified CPA will help you ensure that you have chosen the best method of taxation for your business. Attorneys are able to legally do whatever you want in a business set-up or a contract, BUT it may not be advantageous tax-wise so always, always, always consult with a CPA. However, your CPA should not be giving you legal advice or forming your company.

A “qualified CPA” for your business is a CPA that has experience in business formation, maintenance and dissolution. You should always consult with a CPA, but make sure that the CPA has handled businesses like yours. Just like attorneys, CPAs have specialties so be sure yours understands the finances of your particular business. For example, if you sell goods, be sure your CPA is well-versed in Transactional Privilege Tax (TPT aka sales tax) reporting. If you have employees, make sure your CPA has handled payroll reporting.

Attorney and CPA fees are generally tax deductible for business entities. Your business should always have a pre-established relationship with an attorney and CPA in case an issue comes up that requires immediate attention. Hopefully, because you have consulted with both an attorney and CPA you will have prevented some of the common pitfalls that require immediate attorney or CPA attention. Regardless, when you consult with an attorney or CPA, their fees are tax deductible.

Yes, cost effectiveness, time management and efficiency. I could do my business taxes on TurboTax myself, but I don’t want to waste my time figuring out something that a tax professional can do correctly and more quickly than I can. I like the knowledge that if (God forbid) there is a mistake, my tax professional has malpractice insurance that will cover me in an audit, and I am not going to have to pay hundreds or thousands of dollars to correct the mistake I made doing my tax returns myself. I will pay more to have a tax professional correct my errors than I would have if I had a tax professional do my taxes in the first place. Attorneys are the same. It will definitely be more expensive to fix errors than it is to do it right the first time. I have 27 years + business law experience and malpractice insurance for legal matters. Your CPA has no insurance to cover any mistakes regarding legal matters so be sure you speak with an attorney on the structure, maintenance and operation of your business and not just a CPA.

Have a conversation with your attorney about projects that need to be done and a budget for doing so. I do most projects on a flat fee basis which gives you the security of the cost. However, some projects cannot be done for a flat fee because there are too many variables. However, there can be a cap on time spent on hourly fees and a monthly accounting. I am NOT suggesting that this is a negotiation of fees like the Mercado Central in Guadalajara, but a discussion of budget and payment. You do not negotiate with your doctor about the cost of surgery or the dentist if you need a tooth pulled, the same goes for flat fee projects with attorneys. The cost for professional fees is set, but they can be put on a payment plan or worked into an annual budget.

Anybody can form a business entity. It is what you do with the business entity and how you do it that matters. You need to consult with both an attorney and CPA to make sure that you are operating your business entity correctly. Also, attorneys and CPAs need to stay in their own lanes. You would not have me (an attorney) do your taxes (that would be silly as I do not have CPA after my name) so why would you have your CPA do your attorney’s job? You need both. Consulting with an attorney prior to the formation of your business entity will limit your overall costs. It is easier to set up proper management/ownership and put a succession plan in place at the beginning of your business than having to change it later (which is more expensive). Also, if you have a CPA do your business formation, understand that the CPA’s malpractice insurance may not cover any mistakes made as this is legal work, just like my malpractice insurance would not cover any mistakes I made doing your taxes.

Yes, you can. It is not hard. However, the nuances as to what should be done before, after and during the life of your company are where you need legal advice. How should you sign documents? What should the structure be? Should your revocable or irrevocable trust own your company? These are questions that require the advice of a legal professional. Also, if you do it yourself and make a mistake, you will Likely pay MUCH more to fix the problem than if you obtained legal advice in the first place. You also will not know you have made a mistake until something bad happens and your personal assets might be at risk.

Yes, yes, they do, and you get what you pay for. What you are paying for is document preparation and not the legal advice that you should have before, during and after you form a business entity. I don’t need to actually form your business entity for you. Anybody can file paperwork and get that done, I will tell you what to do before and after your business entity is formed. Third party filers do not have your back if something goes wrong. They are done after they have formed the business. Read the fine print and know what you are paying for. In my opinion, the fees third party companies charge to form a business are quite expensive for what they actually do. You should also NOT agree to have them as your statutory/registered agent. There is no reason why you need a them to be your statutory/resident agent as you can do it yourself. Unless you have a specific reason to use a company as your statutory/resident agent this is just an annual charge you do not need to pay. If you are going to save money, save it here and not by failing to get legal or tax advice.

A “statutory agent” or a “resident agent” is a person or company that is designated to receive legal correspondence on behalf of the company. In Arizona, the term “statutory agent” is used and in California, Nevada and most other states the term “registered agent” is used, but they mean exactly the same thing. If a company is sued, the statutory agent/resident agent is the one that is served with the legal documents. Every company (except for sole proprietorships/general partnerships) must have one. Statutory/resident agents may use a mailing address for general correspondence but must maintain a physical address within their state because lawsuits (summonses, subpoenas, etc.) must be served in person on a person in most cases.

NO, definitely not. There are many companies that will provide statutory/resident agent services, but if you are a small company, you do not need the added ANNUAL expense. Many third-party companies that form LLCs automatically appoint themselves as your statutory agent/registered agent so that they may continue to receive an annual fee. They do not explain to you that you do NOT need them to be your statutory/registered agent and that you could be your own statutory/resident agent.

A statutory agent/resident agent must have a physical address in the state where the company is registered or formed and be available to receive documents in person at that address during business hours. There are no other requirements. If your statutory agent/resident agent receives legal documents for your company, legally, your company has been served (whether you know about it or not). It does not matter if the statutory/resident agent tells you about the documents or you find out too late. This is why it is critical to have someone trustworthy be your statutory/resident agent and keep the address for receiving documents updated. I recommend that business owners use themselves as their own statutory/resident agent so they will always know what is going on and can do something about it.

If you are not physically located in the jurisdiction where your company is formed or registered, you will have to pay to have someone be your statutory/resident agent. I would use a company that provides statutory/registered agent services for companies regularly. I would not use a CPA or even an attorney. I would hire a company that accepts documents for companies as typically, they have portals to provide notice to the company owners in real time whereas, correspondence could be delayed in getting to you if your CPA’s office is not set up to provide statutory/resident agent services. You may also want to hire a company to provide statutory/resident agent services, if you just don’t want to deal with it. There is very little correspondence for a statutory/resident agent to handle so hiring a statutory/resident agent generally is an unnecessary expense, but it is perfectly acceptable to do so if you are making an educated choice vs. having a decision made for you without being told the alternatives.

The main benefit of forming an LLC or corporation is protection for its owners from personal liability. For example, IF all legal formalities are met, the owners and management of the company are not responsible for the business’ debts or other obligations (unless a personal guarantee has been signed). This means that if the business is sued and a judgment is entered against the company, the creditor could only go after the company assets for collection and not the assets of the company’s owners/management. This is called the corporate veil.

Because LLCs, Corporations and all types of Limited Partnerships are business entities separate and distinct from their owners and management, the owners and management are not personally responsible for the company’s debt or other liabilities. This is a called the corporate veil. It only exists if all corporate formalities to keep ownership/management separate from the business entity itself are followed.

If the owners/management of a business entity do not follow the formalities to keep the company separate and apart from their personal affairs, the owners and management of the company may be personally responsible for the company’s debts and other liabilities. In short, the company will be considered a “sham” or an “alter ego” of the company’s owners/management. Failure to maintain a separate bank account for the company, paying personal bills out of the company bank account, continuing to use the owner’s social security number for company matters, failure to update government agencies with address changes, etc. are all factors to consider when determining whether the corporate veil may be pierced.

From a legal standpoint, a corporation is a corporation is a corporation. The designation “S” or “C” just indicates whether the corporation is taxed under Subchapter S of the IRS Code (S-Corp) or Subchapter C (C-Corp). Generally, companies that gross less than $5,000,000 a year elect to be taxed as an S-Corp, but there is no one size fits all rule. The IRS has its own regulations for ownership and structure for S-Corps so sometimes electing to be taxed as an S-Corp may not be advantageous for other reasons. For example, a company (including LLCs that elect to be taxed as an S-Corp) must distribute profits and losses/distributions equally among owners which may not be what the owners really want. Consult with a CPA regarding any election for taxation. Your tax election may also be changed later, but there are specific rules for doing so. Contact a CPA on all matters regarding methods or taxation.

NO, absolutely not, your company does not have to be a corporation to be taxed under Subchapter S of the Internal Revenue Service Code (S-Corp). Both LLCs and corporations may choose (elect) how they wish to be taxed within seventy-five (75) days of their formation by filling out IRS Form 2553. The choices for taxation are Subchapter C, Subchapter S, Partnership (which is the default if no election is made for a multi-member LLC) and Disregarded Entity (default for single-member LLCs – no separate tax return filed by the owners, income and expenses listed on IRS Form 1040/Schedule C). Business entities may change their method of taxation after the first election but should consult with a tax professional for the specific rules for doing so.

No, if you are an Arizona or California resident you will not be exempt from paying state taxes where you live. You will not pay Nevada personal income state taxes, but you would not anyway because you do not live there. Plus, if you form your LLC in Nevada and it operates in Arizona, you will have the expense of a resident agent in Nevada, annual LLC reporting fees as well as the registration fee for foreign entities in Arizona. You absolutely can form an entity in another state and have it operate elsewhere, but you need to be able to articulate a valid reason why you would go to the extra expense and hassle.

Not necessarily. Unless you can identify a SPECIFIC reason why it is advantageous to form a business in a State where the business does not operate there is no reason to do so. I am not suggesting that there is never a reason to form in Delaware or any other state when you are located elsewhere, but I am suggesting that there should be an identifiable reason why it is worth the extra annual cost to maintain a registered agent in two locations as well as maintaining any annual reporting requirements with government agencies in each state.

A “shareholder” of a corporation is an owner of the corporation, and that ownership is indicated by the owner’s number of shares of stock. After a corporation is formed, it issues shares of stock to its shareholders. The corporation’s shareholders (owners of stock) must meet at least once annually to elect the Board of Directors.

The “Board of Directors” of a corporation is one or more individuals that meet at least once annually to set the policies and procedures of the corporation. The Board of Directors also elects the corporation’s officers and approves the corporation’s Bylaws. A shareholder or officer may be on the Board of Directors, or the Board of Directors may be made up of disinterested third parties or a combination of both.

Legally, the officers of a corporation are a President, Vice President, Treasurer and Secretary. These individuals are the ones that handle the day-to-day affairs of the corporation. The corporate Bylaws detail their roles and responsibilities. Corporations may have other officers or call their officers by different titles, but they should at the very least have the equivalent of a President, Secretary and Treasurer. Officers may be on the Board of Directors; they may be shareholders, or they may not.

Bylaws are the internal governing document of the corporation or the written policies of the corporation. Bylaws contain the basic rules of conduct of the corporation and responsibilities of its officers and Board of Directors. In general, Bylaws are a private document that governs the corporation’s business affairs. Only corporation’s that are publicly traded must make their Bylaws public.

Yes. The law requires that all corporations have Bylaws. If your corporation does not have Bylaws and at some point, your corporation is sued, a creditor could argue that you do not follow corporate formality and therefore, your corporation is a sham. A creditor could possibly be allowed to collect from the shareholders’/officers’/directors’ personal assets for a corporation debt and not just the assets of the corporation.

Corporations must file an annual report with either the Arizona Corporation Commission or the California/Nevada Secretary of State and pay the requisite annual fee. Internally, corporations must have a meeting of the shareholders to elect the Board of Directors and a meeting of the Board of Directors to elect the Officers of the corporation.

Yes, yes and yes. As a practical matter, this is silly. I am a single person corporation and every year on Cinco de Mayo (so I can remember my annual meeting date) I have a “meeting” with my shareholders (me), and they elect the Board of Directors (me). Then, the new Board of Directors (me) meets and elects the new officers. I win all of the elections and really my meetings consist of changing the year in the Meeting Minutes from the previous year and signing them as they are the same year to year. I am the President, Vice President, Treasurer and Secretary of my corporation. I do this because I must maintain corporate formality to keep my personal liability protection even if as a practical matter the formalities are silly for a one-person corporation.

We can help. You should create Bylaws and Annual Meeting minutes as soon as possible. First, this will help you maintain your corporate veil. Second, if you ever want to sell your corporation or your corporate assets you will need them. We can also talk (with your CPA) about converting your corporation to an LLC, so you no longer have to file any type of annual report (AZ LLCs) and you are no longer are required to have annual meetings (unless your Operating Agreement says otherwise). However, from a tax standpoint, this may have ramifications that outweigh the benefits which is why a CPA should be consulted for your specific circumstances.

File annual reports, conduct annual meetings and maintain accurate public and private records. The corporation must be separate and apart from its shareholders (owners) so it must have its own bank account and EIN/TIN.

A “non-profit corporation” (also, more accurately, called a “not-for-profit corporation”) is a corporation just like any other, but it has received tax exempt status from the IRS. Typically, non-profit corporations request IRS Code 501(C)(3) status as they will be providing charitable services, but there are other tax exemptions for non-profit corporations. The Articles of Incorporation and Bylaws for a non-profit corporation need to contain specific language so that the corporation may obtain its tax-exempt status from the IRS. Make no mistake, successful non-profit corporations make a profit, but it goes back into the corporation for charitable works unlike in a “for-profit” corporation where the shareholders receive the benefits of any profit.

If you do not have funds to consult with an attorney before forming your non-profit corporation, you should wait to form it until you do. There are MAJOR pitfalls for the Board of Directors and Officers of a non-profit (some personal) if a non-profit corporation is not formed correctly and more importantly, operated correctly. You also MUST get an attorney who has worked with non-profit corporations to advise you. You are doing a good thing, but you need to do it right or you could be living the saying “no good deed goes unpunished.” If you help fund the non-profit corporation start up, you may be able to use your contribution as a donation or also make it a loan. A CPA should also be involved in this conversation.

No. Non-profit corporations are corporations and must have the structure that a corporation provides.

A “member” of an LLC is an owner of the LLC. Generally, members of an LLC describe their ownership as a “Percentage Interest” or a “Percent Interest” of the LLC. For example, a 50% owner of an LLC would say that the member owns a “50% Percentage Interest” in the LLC. LLC ownership may also be held in units, but this must be designated in the Operating Agreement. LLCs in Arizona, California and Nevada do NOT issue stock and their members do NOT own stock and are NOT shareholders. In some states, LLCs do issue stock and do have shareholders. It is important to use the terminology of the State where your LLC is formed.

A “manager” of an LLC is the individual or individuals that handle the day-to-day activities of the LLC. Managers may be members of an LLC, or they do not have to be. Any manager with authority for the business should be listed appropriately with the Arizona Corporation Commission, California Secretary of State or Nevada Secretary of State. Management roles (and especially limitations on manager authority) should be expressly detailed in the LLC’s Operating Agreement.

A “manager-managed” LLC is an LLC that specifically designates one or more individuals to act as managers of the LLC. They may or may not also be members (owners) of the LLC. A “member-managed” LLC is an LLC where every member (owner) has equal authority to operate the LLC because they are a member. An LLC needs to only have one manager but may have more.

An Operating Agreement is a private internal governing document for an LLC. It details the policies and procedures of the LLC as well as the roles and responsibilities of its members and managers. It is not a public document.

The legal answer for Arizona is no, you do not. HOWEVER, if you are a multi-member LLC (even if just you and your spouse as members), I consider it reckless, ill-advised and akin to playing Russian Roulette if you do not have an Operating Agreement. If something goes wrong and there is no Operating Agreement, you will be governed by the default provisions of the law, and you may not like them. Operating Agreements allow you and your owners to opt out of many provisions of the law that would not be advantageous with your particular business activities, structure or ownership.

I would have a basic Operating Agreement even if you are a single-member LLC. It is always easier to provide and Operating Agreement to a bank or finance company when they ask for one instead of arguing with them about whether the law requires you to have one or not.

Templates can be a good starting place in some instances. However, the laws vary from state to state so you want to be sure that your Operating Agreement follows the law in the state your LLC was formed as a starting point. If you want to DIY an Operating Agreement, at the very least, get one specific to your State and consult with an attorney about the specifics. I think a solid Operating Agreement is where your attorney fee budget should be spent as it is critical for succession plans, management and the day-to-day operations of the LLC.

In the State of Arizona, LLCs do not file annual reports. In California and Nevada, there are annual reporting requirements and fees. In all three states, LLCs must keep their records up to date with their location, mailing address, ownership and management. Keep in mind that when any of these things change, there also may be additional reporting requirements triggered under the Corporate Transparency Act (CTA).

Yes, BUT depending on how the LLC elects to be taxed there may be limits on what type of business entity may own an LLC. A CPA should be consulted to make this determination.

Generally, my answer is yes, if you can. If a rental property is owned by an LLC, if there is a problem with a tenant on that property, the tenant could only successfully sue the LLC and not the owner/manager of the LLC. Also, if the tenant ever received a judgment against an LLC, the tenant could only successfully collect from LLC assets and not the assets of the LLC owners/managers. You should also be sure that your insurance will cover the rental property if it is transferred into an LLC. Insurance generally covers anything that happens on the property, but in the event it does not having the rental property in an LLC is added protection.

Having each rental property in its own LLC provides maximum personal liability protection for LLC owners/managers, however it is a practical nightmare (separate EiNs, bank accounts, etc. to follow formality). Sometimes it is best to form a holding company or management company as the umbrella and then have separate LLCs for various rental properties. Alternatively, it may be beneficial to look at forming a Series LLC out of Nevada. There are many ways to handle these situations and there is no right or wrong answer. This is why you seek legal advice.

A “Series LLC” is a business structure that has a master LLC and unlimited sub-LLCs (known as the series, cells or branches). Each sub-LLC is segregated from the other sub-LLCs and the master LLC. Each sub-LLC also has its own assets, members, managers, purpose and goals. If one sub-LLC is sued or owes a debt, the assets of the others are not at risk.

Series LLCs are a good mechanism for rental investments as they avoid the necessity of forming a separate LLC for each rental property. However, each sub-LLC must maintain its own bank account and be separate from the others so administratively there may be the same amount of work. Also, there may be additional costs if your business is not located in a state that allows the formation of Series LLCs in the state. For example, Nevada allows a Series LLC to be created under Nevada law and California and Arizona do not. Arizona and California allow Series LLC to be recognized in Arizona and California so a Series LLC could be formed in Nevada and registered to do business in another state. If you are considering a Series LLC, you must have a comprehensive Operating Agreement and you should talk to a CPA that has dealt with Series LLCs before.

A foreign business is any business entity that was not formed in the state where it is operating. If an entity is formed in Delaware and it wants to do business in Arizona, it is considered a foreign business doing business in Arizona. Any business that was formed outside of the U.S. is also considered a foreign business and may need to register in the state where it is operating.

Generally, a business that was formed outside the state where it wants to do business must register to do business in the state where it wants to operate. For example, if a Nevada LLC wants to do business wants to do business in Arizona, it would need to register to be a foreign LLC doing business in Arizona. Foreign registration is a matter of filing the appropriate paperwork and paying a fee. Foreign business entities registered to do business in other states must comply with the registration state’s annual reporting requirements but are still governed by the laws of the state of their formation.

A “business succession plan” is a roadmap for what happens if (God forbid) something happens to any key person in the company (temporarily or permanently). Will the company carry on? Will the company be forced to shut down? Will your ownership be subject to probate? A succession plan is a procedure designed to help avoid probate and allow your company to continue so it can be sold (in the worst case) or it can also be a procedure for how you can exit the company when you want to retire. Succession plans do not have to be hard and many times they only require simple changes, but you should have a succession plan (personally and professionally) no matter what.

If something happens to you either temporarily or permanently, you do not want to lose something you have worked so hard for because you cannot operate it. If you have died, you also want your heirs to benefit from your work. A succession plan takes the guess work out of what happens when you are temporarily or permanently unable to run your business by setting a clear path for how the business will respond to the unexpected.

A business “exit strategy” is just a “business succession plan” said another way. An exit strategy is a plan for the future. At some point, you or other owners want to do something else, retire, sell the business or sell your portion of the business. At the onset, it is the best practice to have a plan for valuing the business so that any transition is smooth. It is also critical to maintain all the formalities of a business (keeping public records current, updating internal governing documents, filing taxes, etc.) not only to maintain the corporate veil to protect your personal assets, but also to effectuate a smooth transition out of the business.

It is best to have an exit strategy as soon as possible especially when you have multiple business owners. Many times, when an owner decides that he/she wants to leave the business for whatever reason (retirement, etc.) the parties may disagree and how that owner should be compensated for his/her ownership interest in the business. It is best to decide buy-out provisions early on so there is no dispute later. If there is an exit strategy in place, the owners just need to follow the plan they agreed to so there are fewer arguments.

You want to consider what happens in the event or an owner death, permanent or temporary disability, divorce, marriage or voluntary buy-out. This is not an exhaustive list, but a means to illustrate the situations to consider and account for when crafting your exit strategy/succession plan.

Arizona, California and Nevada are community property states which means, generally, that spouses each own 100% of what the other owns unless other steps have been taken. Spouses can disclaim an interest in a business such that they have no interest in it, they may also have a prenuptial or postnuptial agreement stating that they are keeping their ownership interests separate. They may also take steps to keep their individual assets separate and apart from the marital community. If an owner is married, that potentially brings another person into the business as an owner, if an owner is divorced, it may take a person out of ownership, and he/she may want to be paid for it. These are things to consider and account for. There is no right or wrong way to handle these situations so long as educated decisions are made. Also, marriage and divorce of owner spouses may affect the business’ Beneficial Ownership Information Report (BOIR) under the Corporate Transparency Act (CTA) such that it needs to be updated within 30 days of the change.

Regardless of whether you are a single owner or have a multi-owner business, you are leaving a mess for your heirs and/or the other business owners. If your interest in the business values at over $75,000, your ownership interest would need to be probated with the court. Alternatively, in Arizona, if your ownership interest values at less than $75,000 your heirs may be able to pass your business interest by Affidavit. Both of these scenarios are a hassle AND they cost money. They also vary by state. If you put a business succession plan in place, you can very easily avoid this added stress on your grieving family. Also, if you are temporarily disabled and unable to run the business with no plan in place, you may lose everything you have worked for because there is no person with authority to take care of matters when you can’t.

Depending on the type of business and the state you are located in, business may sometimes be owned as a joint tenancy/community property right of survivorship or by a trust. In addition, payment for a business interest to the heirs of an owner may be paid by a life insurance policy or alternatively, through a business valuation and agreed upon pay out. Powers of Attorney may also be tools for managing the business in the event of temporary disability.

It can be, but generally any exit strategy/succession plan is contained in the internal governing document of the business (Operating Agreement, Bylaws, Partnership Agreement). There is no right or wrong way, but it is critical that you do something.

SEEK LEGAL ADVICE IMMEDIATELY. Information is power and you need to know what options are available to you so you can make educated decisions. Don’t wait until the business is completely dead or on its last legs, contact counsel and make a plan as soon as possible. Sometimes companies that think they are going to fail are able to get financially healthy with some adjustments the law provides. Make sure you have accurate, sound legal advice specific to your circumstances as soon as possible.

The two biggest mistakes that companies in financial distress make are failure to pay: Payroll Taxes (Withholding Taxes); or TPTs (sales tax). These are considered trust fund taxes and the owners of the company (and in some instances their bookkeepers) may be held 100% responsible for their payment and penalties. Pay these taxes when due even if it hurts. Failure to do so will create additional problems for both the business and its owners.